A resolution to keep: Unlock the interlocks
Interlocking directorates arise when a director or officer of one company sits on the board of a competing company. Competition agencies consider that interlocks may provide the means for two competing businesses to coordinate their commercial activities or exchange competitively sensitive information. An interlock can arise in many circumstances. For example, in an M&A context where a new shareholder appoints its director to the board of the target. Or when two companies with a shared director suddenly become competitors after one company launches a new product or business line.
Antitrust enforcers, particularly in the U.S., have identified interlocks as an enforcement priority and conducted high-profile investigations. For example, the U.S. agencies required the resignation of Eric Schmidt of Google from Apple’s board in 2009.
Companies that ignore this issue risk the cost and uncertainty of an in-depth investigation as well as potentially expansive enforcement. In the EU, this issue has mainly arisen in the course of merger investigations but with the European Commission pursuing theories involving common ownership (e.g. by passive funds), interlocking directorships may see more enforcement focus in the future.
The U.S. position
In the U.S., Section 8 of the Clayton Act prohibits a person from serving as a director or officer of any two entities engaged in commerce if:
- each of the entities has capital, surplus, and undivided profits of more than $36.5 million, subject to certain exemptions; and
- the two corporations compete with one another in such a way that an agreement between them to eliminate competition would violate antitrust laws.
Liability does not require anti-competitive harm to have occurred. Violations of Section 8 are typically cured through voluntary removal of the interlock. However, injunctive relief is sometimes sought and actions for private damages are also possible.
Importantly, while Section 8 deals strictly with interlocks, anti-competitive conduct stemming from an interlock may be actionable under other U.S. antitrust laws. This includes Section 1 of the Sherman Act (price fixing) and Section 5 of the FTC Act (unfair competition). Violations of these Acts can result in severe criminal and civil penalties, involving prison sentences and monetary damages.
The EU position
Although the EU does not have the same outright prohibition of interlocks as a matter of express law, EU antitrust law is wide enough to reach the anti-competitive impact that can arise from them. This means that the European Commission can review interlocks as a means of facilitating anti-competitive coordination or improper information exchange under Article 101.
In a merger control context, the EC may view an interlock as a means of decisive influence under the EU merger regulation and require that it be unwound as a remedy. This has happened in a few cases to date, including Thyssen/Krupp, Nordbanken/Postgirot, Generali/INA and AXA/GRE. These transactions were cleared subject to the waiving of rights (amongst other things) to appoint interlocking directors. Companies should be prepared to provide information to authorities on the interlocking directorship positions they hold in competitors, and more generally on common investors. The EC, in particular, is paying increasing attention to these indirect links with competitors.
Many other jurisdictions around the world take a similar approach to the EC in that they do not impose a specific prohibition on interlocks but use general antitrust laws to address potential anti-competitive effects. Some jurisdictions have more recently adopted express prohibitions in common with the U.S., for example Chile.
Mitigating your risk
Regardless of the legal regime at issue, interlocks have the potential to create antitrust risk. And, if detected, can expose companies to lengthy investigations by antitrust enforcers, fines and, worst-case scenario, potentially result in allegations of price fixing or other cartel behavior.
Companies must plan ahead, in order to mitigate this risk. Among certain proactive measures, the activities of corporate officers and directors should be monitored to identify interlocks. Interlocks should be monitored to identify and track areas of competitive overlap and all relevant employees should receive compliance training on the special risks that arise from board service. Practically speaking, companies can manage this risk by maintaining a register of all their officers and directors. This should be regularly updated and cross-checked against a register of other positions held by those individuals in other companies.
Interested in further reading?
Linklaters contributed a chapter regarding interlocking directorates to a recent book published by the American Bar Association’s Antitrust Law Section: The Antitrust Compliance Handbook: A Practitioner’s Guide. The Handbook is designed to assist both outside and in-house counsel in designing and administering effective antitrust compliance programmes across a corporation's full range of commercial activity.
If you are concerned about a potential interlock or would like to learn how you can strengthen your antitrust compliance program, please speak with your regular Linklaters contact.